Post on 12-Mar-2018
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FRICTIONS AND COMMERCEDavid R. Bell
Xinmei Zhang and Yongge Dai Professor
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• Frictions in real world markets
• “Frictionless” commerce in the virtual world
• Introduction to online-offline interaction
Overview
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“I don’t make money when I sell books. I
make money when I help customers make
better decisions.”
Jeff Bezos, CEO of Amazon
(when all Amazon did was sell books)
Insight on Frictions
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• Imagine that you want to buy a big screen TV so you can
watch the inaugural Rugby World Cup Final in Auckland, New
Zealand.
• It’s 1987 and the Internet can’t help you.
• So, what do you do?
• [Side note: In 1987, The New Zealand All Blacks played
France in Auckland, New Zealand and in 2011 the same two
teams met again at the same venue (with the same outcome in
both instances!)]
Thought Experiment 1
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Two Key Frictions in the Real Economy
• Search friction
• Geographic friction
• However, the data on where dollars (or rupees) are spent
illustrates that the most transactions occur offline
• What does this imply (Hint: “frictions” are involved)
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Source: Euromonitor, Morgan Stanley Research; excludes travel
0%
2%
4%
6%
8%
10%
12%
10%
8%
6%
1%
USUK China India
Percentage of Commerce Transacted Online
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History
• Markets for information and goods were local. As a
result, the opportunities available to consumers were
limited by the size of the local market
• When it occurs, agglomeration (the “gathering
together” of people with similar preferences) improves
the consumption opportunities of the individual
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Impact of the Internet
• The Internet and internet-connected devices level
the playing field between “consumption rich”
locations, e.g., New York City and more
“consumption poor” locations, e.g., Iowa City.
• The effects of the Internet are, however, different
for goods and information
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Research on Goods and Information
• Globally, consumers who live further from offline commerce
options are more likely to shop online for goods
• Furthermore, consumers who live in large cities are heavy
consumers of information (another 50-60 ”local sites” for
every additional 1m residents)
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• So, the Internet helps you access goods when you: (1)
live in a small place, and / or (2) have preferences that are
different to those of your neighbors
• And, the Internet delivers information that helps you to
your environment when you live in larger city
Research on Goods and Information
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Research Findings: (Some) Consumer Benefits
• Lower prices and lower search costs for items you
wish to buy
• Higher resale values and more liquidity for items that
you wish to sell
• More precise local information
• Increased convenience
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Online-Offline Interaction (Variety)
• The online and offline economies compete differently for
popular items versus niche items
• Example: Consider the following two books:
• Harry Potter and the Sorcerer’s Stone
• Ritchie McCaw: The Open Side
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Summary
• Real world markets impose two important frictions on consumers,
search friction and geographic friction
• The Internet helps alleviate both, but helps consumers in large
and small markets differently
• The Internet also imposes its own set of frictions (many new
companies are starting up to eliminate them)
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ONLINE-OFFLINE OVERVIEW David R. Bell
Xinmei Zhang and Yongge Dai Professor
WHARTON ONLINESource: Euromonitor, Morgan Stanley Research; excludes travel
0%
2%
4%
6%
8%
10%
12%
10%
8%
6%
1%
USUK China India
Global Online Commerce Percentages
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Information
Drives Decisions
Online Needs
Offline
Digital Versus
Non-Digital
Mobile Changes
Everything
Online-Offline Fundamentals
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Recap
• Value is created when customers can “make better decisions”
• Customers are present offline and online—business needs to betoo
• Every product or service contains digital (D) and non-digital (ND)attributes—converting ND to D or eliminating uncertainty aboutND is key
• The “computer in the pocket” of billions worldwide will touch
every market (remember the Five Rules of Mobile)
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OFFLINE-ONLINE (O2O)David R. Bell
Xinmei Zhang and Yongge Dai Professor
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• O2O: Core functions of Information and Fulfillment
• Two research studies that leverage the online and offline worlds differently
Overview
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Key Concepts
• The online environment is especially good for rapidcommunication of digital attributes of products and deliveryof content
• The offline environment is especially good for brandbuilding and communicating non-digital attributes
• Firms interact with customers through the core functions ofinformation and logistics
• Information and logistics can be delivered online or offline
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FulfillmentIn
form
atio
n D
eliv
ered
Offline
Onl
ine
Online
Offl
ine Real Economy
Transaction Showrooms
BOPS and ROPO Digital Economy Transaction
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Research Studies
• BOPS and ROPO research study using information from theoffline-first brand Crate & Barrel (http://www.crateandbarrel.com
• Showroom research study using information from the digital-firstbrand Warby Parker (http://www.warbyparker.com
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ROPO
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Treatment GroupCrate & Barrel store
within 50 miles
Control GroupNo Crate & Barrel
store within 50 miles
Treatment and Control Groups
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BOPS and ROPO Study
• Treatment group customers had two options when they went tothe www.CrateandBarrel.com and placed an order:– First, they could have the products they bought shipped to
them (offline fulfillment)– Second, they could go into the store and pick up their
purchases (offline fulfillment)
• Control group customers had only one option when they wentto www.CrateandBarrel.com—they had to have the productshipped
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7%online sales
1%cart
abandonmentstore sales
6%store traffic
13%
Findings
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http://www.cbsnews.com/videos/warby-parker-tops-fast-company-magazines-annual-list-of-most-innovative-companies-in-the-world/
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Showroom Study
• Treatment group customers had three options for how theyacquired information about Warby Parker– First, they could go to the website (offline information)– Second, they could use the sampling program (offline
information)– Third, they could go to the showroom (offline information)
• Control group customers had the first two options only
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Channel 1: Online
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SHOWROOMS
Channel 2: Sampling
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Channel 3: Showroom
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Home Try-On
Online Showroom
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Home Try-On Sales
5%Web Sales3.5%
Total Sales8.8%
Findings
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Web Returns
1.2%Home
Try-On Repeat
1.5%Home Try-On Orders
7.8%
Findings
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Exercise
• Consider the implications of our O2O framework for two differenttypes of firms: (1) resellers of brands built buy others, and (2)vertical brands
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Summary
• It helps to think of online-offline interaction through the lens oftwo core functions: information and geographic friction
• When deciding what activity to perform online or offline, alwaysthink about the “fit” of the activity to the channel
• Remember: consumers operate in all four cells of our O2Omatrix so in most cases, firms need to as well
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VARIETY AND THE DIGITAL
ECONOMY David R. Bell
Xinmei Zhang and Yongge Dai Professor
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Two Principles of Variety
• Cost Until relatively recently, it was relatively expensive to offer
“more variety” to customers due to the cost of storage and
distribution of goods and services
• Winners In most contexts the “80/20” or Pareto Principle held
true
• However, the economics of creation and distribution of goods
and services have been radically altered
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“A Long Tail is just culture unfiltered by
scarcity”
Chris Anderson
Definition
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The Long Tail
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Principles
• Supply Long tail businesses exist because technology has
changed the economics of creation, storage and distribution
• Demand Long tail businesses succeed when customers have
access to recommendation and search tools that allow they to
discover and consume the variety that they want
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Implications
• I1 The ratio business contributed Niche : Hits is increasing
• I2 More and more product categories are becoming “Long
Tail Businesses” as hard goods and services are turned into
soft ones (digital creation and distribution)
• I3 Recommendations, reviews, and search tools are
essential to the profitability of any Long Tail Business
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Long Tail Businesses
• Fashion www.farfetch.com
• Education https://www.edx.org/
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Research Findings: Catalogs vs. Internet
• When both channels offer the same products at the same prices, the
Internet channel has a more evenly distributed sales distribution
• This was made possible by recommendations and search functionality
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Summary
• The Long Tail has always been latent but just not produced
(consumers have different preferences and want variety)
• The digital economy facilitates the supply of Long Tail products
and services
• Long tails only “work” in practice when buyers have the
necessary tools of discovery
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NETWORKS
David R. Bell
Xinmei Zhang and Yongge Dai Professor
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Networks
“Pathways though which information, advice, and resources flow
between people.”
(Real world and virtual world)
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Overview
• Features of networks and why they are so important
• Our two key “buzzwords” of homophily and contagion (patterns
of influence)
• Our goal as (digital) marketers is to understand how to create
networks for our products and services as well as leverage the
preexisting and naturally occurring networks
• We’ll also explore principles gleaned from research
• And we’ll conclude with an exercise
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http://www.youtube.com/watch?v=pJfq-o5nZQ4
Networks in Action
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• As implied by the video, a “network” can be a simple as a dyad,
e.g., two partners, or much more complex and encompass
multitudes of individuals. Four key elements are
• Nodes (people)
• Connections (between people)
• Dynamic behavior as ties form and break
• Formation and operation with our without constraints
(geography, socioeconomics, culture, etc.)
Review of Components
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The Key Principles
• Networks typically exhibit homophily (“birds of a feather flocking
together”)
• Networks can facilitate influence (and potentially have “viral”
properties—more about that in another lecture )
• What does the research say?
– Classic studies on connectivity, degrees, and influence
– Wharton study I (online shopping)
– Wharton study II (physicians)
– UCLA study (online networks)
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Connectivity
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Influence
• Key facts:
– 1 person looks up then
4% of bystanders do
– 15 people look up then
40% of bystanders do!
– A form of “social proof” or
social observation
– Six degrees, three steps,
and weak ties
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Connectivity and Influence: Online Shopping
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Connectivity and Influence: Physicians
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Review of Learning Points
• We should expect homophily to exist (and there might also be
ways to leverage it—we will discuss this in another lecture )
• Self reported opinion leaders adopt sooner, but they are not
necessarily more influential
– We need to develop measures of “influence” and connectivity
– We need to recognize that influence can vary enormously
within and across networks
• Sometimes we want to distinguish the separate effects of
homophily and influence
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Connectivity and Influence: Online Networks
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Study Features
• Online social network defining influence as follows:
– A member is “influential” if when she increases her activity on
the SNS then connected others do as well
– A member is “non-influential” if changes in her usage behavior
are not associated with any change in the behavior of
connected others
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Study Findings
• Enormous variation in the absolute levels of influence occurring
in networks of the same size
• Simple metrics, e.g., friend counts are no good
• Extreme users are critical to value
• The average user doesn’t really influence anyone and, in turn, is
not influenced by anyone either
– We are influenced by about 20% of our friends
– About a third of us are “mavericks” and not influenced by
anyone
– Individual characteristics matter
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Individual Characteristics
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Exercise
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